A Majority Shareholder’s Fiduciary Duty Relates Only to the Business & Its Property
Where a minority shareholder complained about the majority shareholder’s new business ventures, no fiduciary duty was actually owed to the minority shareholder beyond that related to the business’ property. Panzino v. MAP, 2021 NCBC 10 (J. Conrad). Because the new business ventures were unrelated to the company’s property, the majority shareholder did not breach any fiduciary duty, and thus no claim for constructive fraud existed.
Plaintiff was a minority shareholder in 5 Church, Inc. (“Company”), which owned and operated a restaurant in Charlotte, NC. Defendant MAP was the majority shareholder and managing member of the Company. Defendant opened two additional restaurants on its own and without any use of the Company’s assets. However, Defendant did not offer Plaintiff an opportunity to invest in either new restaurant. Plaintiff filed suit, contending MAP’s failure to give Plaintiff an opportunity to invest in the new businesses breached the fiduciary duty MAP owed to Plaintiff as a minority shareholder and thus constituted constructive fraud. MAP moved to dismiss, contending Plaintiff failed to allege facts sufficient to sustain a claim for breach of fiduciary duty and, as a result, constructive fraud.
The Business Court agreed. Recognizing that to maintain a claim for constructive fraud, Plaintiff had to allege facts sufficient to support both the existence of a fiduciary duty and the breach of that duty, the Business Court held that MAP (as a majority shareholder) did owe a fiduciary duty to Plaintiff (as a minority shareholder), but only to the extent of the management of the Company and its property. MAP’s breach (as alleged by Plaintiff) did not actually relate to the Company or its property, as MAP’s other business opportunities did not involve the Company’s property. For this reason, Plaintiff’s complaint was distinguishable from the Delaware Supreme Court case, Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 624 A.2d 1199, 1204, 1206-1207 (Del. 1993), which recognized a claim for breach of fiduciary duty where the general partner opened another business with the partnership’s assets (i.e., its investment funds). Absent an allegation that MAP had misused the Company’s property, and with no factual allegations to support a fiduciary duty related to MAP’s own investment activities, Plaintiff’s claim for constructive fraud failed.
Based upon this decision, a business or its shareholder accused of breaching a fiduciary duty should closely exam the duty claimed to be have been violated, recognizing that such duties are often limited in nature.
Additional Legal Points:
An alleged violation of an operating agreement’s term which might otherwise support a breach fiduciary duty claim, may nonetheless be limited by the economic loss rule. (Opinion, FN1).